It is estimated that approximately 41% of revenue, close to $53 billion, is “lost” in software piracy. This number is totally misleading since it assumes that all the people who knowingly or unknowingly pirated software would have bought the software at the published price had they not pirated it. RIAA also applies the same nonsense logic to blow the music piracy number way out of proportion. The most people who pirate software are similar to the people who pirate music. They may not necessarily buy software at all. If they can’t pirate your software, they will pirate something else. If they can’t do that, they will find some other alternative to get the job done.

Fortunately, some software companies understand this very well and they have a two-pronged approach to deal with this situation: prevent large scale piracy and leverage piracy when you can’t prevent it. If an individual has access to free (pirated) software, as a vendor, you’re essentially encouraging an organic ecosystem. The person who pirated your software is more likely to make a recommendation to continue using it when he/she is employed by a company that cannot and will not pirate. This model has worked extremely well. What has not been working so well and what the most on-premise vendors struggle with is the unintentional license usage or revenue leakage. Customers buy on-premise software through channels and deploy to large number of users. Most on-premise software are not instrumented to prevent unintentional license usage. The license activation, monitoring, and compliance systems are antiquated in most cases and cannot deal with this problem. This is very different than piracy because the most corporations, at least in the western world, that deploy the on-premise software want to be honest but they have no easy way to figure out how many licenses have beed used.

In the SaaS world, this problem goes away. The cloud becomes the platform to ensure that the subscriptions are paid for and monitored for continuous compliance. You could argue that there is no license leakage since there are no licenses to deal with. But, what about piracy? Well, there’s no piracy either. This is a bad thing. Even though a try before buy exists, there’s no organic grass-roots adoption of your software (as a service) since people can’t pirate. In many countries where software piracy is rampant, the internet access is not ubiquitous and bandwidth is still limited. This creates one more hurdle for the people to use your software.

So, what does this mean to you?

SaaS ISV: It is very important for you to have a freemium model that is country-specific and not just a vanilla try-before-buy. You need to get users start using your service for free early on and make it difficult for them to move away when they work for someone who can pay you. Even though you’re a SaaS company, consider a free on-premise version that provides significant value. Evernote is a great example of this strategy. It shouldn’t surprise you that people still download software, pirated or otherwise. Don’t try to change their behavior, instead make your business model fit to their needs. As these users become more connected and the economics work in their favor, they will buy your service. It’s also important to understand that the countries where piracy is rampant, people are extremely value conscious.

On-premise ISV: Don’t lose your sleep over piracy. It’s not an easy problem to solve but do make sure that you’re doing all you can to prevent it. Consider a freemium business model where you’re providing a clean and free version to your users. If the users can get enough basic value from a free version, they are less likely to pirate a paid version. What you absolutely must do is to fix your license management systems to prevent unintentional license usage. Help yourself by helping your customers who want to be honest. The cloud is a great platform to collect, clean, and match all the license usage data. You have a little or no control over customers’ landscapes but you do have control over your own system in the cloud as long as there’s a little instrumentation embedded in your on-premise software and a hybrid architecture that connects your on-premise software to the cloud. In nutshell you should be able to manage your licenses the way SaaS companies manage their subscriptions. There are plenty of other benefits of this approach including the most important benefit being a SaaS repository of your customers and their landscapes. This would help you better integrate your future SaaS offerings and acquisitions as well as third-part tools that you might use to run your business.

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Technology, Design, and Innovation strategist at the Office of the CEO, SAP, focusing on technology and architecture strategy and strategic operational, product, and management innovation. Adjunct faculty at Santa Clara University and San Jose State University with the department of computer engineering teaching graduate classes. Frequent speaker at conferences, special events, Chirag blogs at Cloud Computing.